Tax efficient payroll for 2024 2025

Here at Blue Leaf, we are always looking ahead at the most tax-effective way for directors to extract profits from their small limited company. 

In previous years, the most tax efficient way to structure salary and dividend was to withdraw the personal allowance of £12,570 through payroll and taking the rest as dividends.  However, with the introduction of the 25% corporation tax rates and the reduction in Class 1 National Insurance Contributions (NIC) for employees, we need to look at the possibility of restructuring this setup to save tax if your company’s taxable profits are over £50,000.

If you have a company with taxable profits of less than £50,000

If your company’s taxable profits are less than £50,000 a year, the most tax efficient method would be to continue drawing a salary of £12,570 (which will be covered by the personal allowance) and the rest as dividends (which will be taxed at 8.75%) as in previous years IF your company is eligible to claim the Employment Allowance (EA).

If your company is not entitled to claim the EA, for example, if there is only one director on the payroll then we would advise drawing a salary up to the secondary threshold of £9,100 per year and the rest as dividends.

In a nutshell:

If your company is eligible to claim EA – declare a salary of £12,570

If your company is not eligible to claim EA – declare a salary of £9,100

If you have a company with taxable profits in excess of £50,000

Below will be some scenarios as to how best to extract a salary from a company with a £100,000 profit, a £75,000 profit and a £50,000 profit.  The idea here is to use payroll to reduce the company’s taxable profits to £50,000 to keep within the 19% corporation tax band.

In each case our aim is to extract £50,000 from the company making the best use of the dividend allowance of £500 and personal allowance of £12,570

Scenario 1 – a company with a £100,000 profit

The most tax efficient structure in this case would be as follows:

Salary of £49,500 and a dividend of £500.

The salary of £49,500 would reduce the company’s profits to £50,500 which keeps the majority of the profit being taxed at 19%.

Scenario 2 – a company with a £75,000 profit

The most tax efficient structure in this case would be as follows:

Salary of £25,000 and a dividend of £25,000

The salary of £25,000 would reduce the company’s profits to £50,000 keeping within the 19% rate of corporation tax.

Scenario 3 – a company with a £50,000 profit

The most tax efficient structure in this case would be as follows:

Salary of £12,570 and dividend of £37,430.

As the company has profits of £50,000 they have not hit the higher tax rate for corporation tax and dividends taken are also under the basic rate for personal tax, depending on what other income streams there are for the director.

As you can see, there is a science to balancing out your director’s salary and the corporation tax.  The point is to ensure your business is as tax efficient as possible.  If you’d like to talk more about how we can help you be more tax efficient, send us a message and we will arrange a call.